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1、Chapter 8Chapter 8Relationships among Inflation, Interest Rates, and Exchange RatesRelationships among Inflation, Interest Rates, and Exchange Rates1.Assume a two-country world: Country A and Country B. Which of the following is correct aboutpurchasing power parity (PPP) as related to these two coun
2、tries?a.If Country As inflation rate exceeds Country Bs inflation rate, Country As currency willweaken.b.If Country As interest rate exceeds Country Bs inflation rate, Country As currency willweaken.c.If Country As interest rate exceeds Country Bs inflation rate, Country As currency willstrengthen.d
3、.If Country Bs inflation rate exceeds Country As inflation rate, Country As currency willweaken.ANS: APTS:12.Given a home country and a foreign country, purchasing power parity (PPP) suggests that:a.a home currency will depreciate if the current home inflation rate exceeds the currentforeign interes
4、t rate.b.a home currency will appreciate if the current home interest rate exceeds the currentforeign interest rate.c.a home currency will appreciate if the current home inflation rate exceeds the currentforeign inflation rate.d.a home currency will depreciate if the current home inflation rate exce
5、eds the currentforeign inflation rate.ANS: DPTS:13.The international Fisher effect (IFE) suggests that:a.a home currency will depreciate if the current home interest rate exceeds the currentforeign interest rate.b.a home currency will appreciate if the current home interest rate exceeds the currentf
6、oreign interest rate.c.a home currency will appreciate if the current home inflation rate exceeds the currentforeign inflation rate.d.a home currency will depreciate if the current home inflation rate exceeds the currentforeign inflation rate.ANS: APTS:14.Because there are a variety of factors in ad
7、dition to inflation that affect exchange rates, this will:a.reduce the probability that PPP shall hold.b.increase the probability that PPP shall hold.c.increase the probability the IFE will hold.d.B and CANS: APTS:15.Because there are sometimes no substitutes for traded goods, this will:a.reduce the
8、 probability that PPP shall hold.b.increase the probability that PPP shall hold.c.increase the probability the IFE will hold.d.B and CANS: APTS:16.According to the IFE, if British interest rates exceed U.S. interest rates:a.the British pounds value will remain constant.b.the British pound will depre
9、ciate against the dollar.c.the British inflation rate will decrease.d.the forward rate of the British pound will contain a premium.e.todays forward rate of the British pound will equal todays spot rate.ANS: BPTS:17.Given a home country and a foreign country, the international Fisher effect (IFE) sug
10、gests that:a.the nominal interest rates of both countries are the same.b.the inflation rates of both countries are the same.c.the exchange rates of both countries will move in a similar direction against othercurrencies.d.none of the aboveANS: DPTS:18.Given a home country and a foreign country, purc
11、hasing power parity suggests that:a.the inflation rates of both countries will be the same.b.the nominal interest rates of both countries will be the same.c.A and Bd.none of the aboveANS: DPTS:19.If interest rates on the euro are consistently below U.S. interest rates, then for the international Fis
12、hereffect (IFE) to hold:a.the value of the euro would often appreciate against the dollar.b.the value of the euro would often depreciate against the dollar.c.the value of the euro would remain constant most of the time.d.the value of the euro would appreciate in some periods and depreciate in other
13、periods, buton average have a zero rate of appreciation.ANS: APTS:110.If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:a.some corporations with excess cash can lock in a guaranteed higher return on futureforeign short-term investments.b.some cor
14、porations with excess cash could have generated profits on average from coveredinterest arbitrage.c.some corporations with excess cash could have generated higher profits on average fromforeign short-term investments than from domestic short-term investments.d.most corporations that consistently inv
15、est in foreign short-term investments would havegenerated the same profits (on average) as from domestic short-term investments.ANS: CPTS:111.Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate inequilibrium and:a.the income differential.b.the forward
16、discount or premium.c.the inflation differential.d.none of the aboveANS: CPTS:112.According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflationover one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% realreturn on in
17、vestments over one year, the nominal interest rate on one-year U.S. Treasury securitieswould be:a.2%.b.3%.c.2%.d.5%.e.8%.ANS: ESOLUTION:5% + 3% = 8%PTS:113.According to the international Fisher effect, if investors in all countries require the same real rate ofreturn, the differential in nominal int
18、erest rates between any two countries:a.follows their exchange rate movement.b.is due to their inflation differentials.c.is zero.d.is constant over time.e.C and DANS: BPTS:114.Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is15%, and the nominal
19、 British rate is 13%, then according to the IFE, the British inflation rate isexpected to be about _ the U.S. inflation rate, and the British pound is expected to _.a.2 percentage points above; depreciate by about 2%b.3 percentage points above; depreciate by about 3%c.3 percentage points below; appr
20、eciate by about 3%d.3 percentage points below; depreciate by about 3%e.2 percentage points below; appreciate by about 2%ANS: EPTS:115.Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interestrate is 6% and the nominal Swiss rate is 4%. According to the int
21、ernational Fisher effect, the franc will_ by about _.a.appreciate; 3%b.appreciate; 1%c.depreciate; 3%d.depreciate; 2%e.appreciate; 2%ANS: EPTS:116.Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest ratedecreases while the Chilean nominal interest rate re
22、mains stable. According to the international Fishereffect, this implies expectations of _ than before, and that the Chilean peso should _ against thedollar.a.lower U.S. inflation; depreciateb.lower U.S. inflation; appreciatec.higher U.S. inflation; depreciated.higher U.S. inflation; appreciateANS: A
23、PTS:117.According to the international Fisher effect, if Venezuela has a much higher nominal rate than othercountries, its inflation rate will likely be _ than other countries, and its currency will _.a.lower; strengthenb.lower; weakenc.higher; weakend.higher; strengthenANS: CPTS:118.If interest rat
24、e parity holds, then the one-year forward rate of a currency will be _ the predictedspot rate of the currency in one year according to the international Fisher effect.a.greater thanb.less thanc.equal tod.answer is dependent on whether the forward rate has a discount or premiumANS: CPTS:119.The Fishe
25、r effect is used to determine the:a.real inflation rate.b.real interest rate.c.real spot rate.d.real forward rate.ANS: BPTS:120.Latin American countries have historically experienced relatively high inflation, and their currencieshave weakened. This information is somewhat consistent with the concep
26、t of:a.interest rate parity.b.locational arbitrage.c.purchasing power parity.d.the exchange rate mechanism.ANS: CPTS:121.Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. Accordingto PPP, the Singapore dollar should _ by _%.a.b.depreciate; 3,11c.d.ANS: AS
27、OLUTION:(1.08/1.03) 1 = 4.85%.PTS:122.The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange ratefor the Japanese yen () is $0.0075. After supply and demand for the Japanese yen has adjusted in themanner suggested by purchasing power parity, the new exch
28、ange rate for the yen will be:a.$0.0076.b.$0.0073.c.$0.0070.d.$0.0066.ANS: CSOLUTION:(1.03/1.10) $.0075 = $.0070PTS:123.Assume that the U.S. inflation rate rate is higher than the New Zealand inflation rate. This will causeU.S. consumers to _ their imports from New Zealand and New Zealand consumers
29、to _ theirimports from the U.S. According to purchasing power parity (PPP), this will result in a(n) _ of theNew Zealand dollar (NZ$).a.reduce; increase; appreciationb.increase; reduce; appreciationc.reduce; increase; depreciationd.reduce; increase; appreciationANS: BPTS:124.The following regression
30、 analysis was conducted for the inflation rate information and exchange rateof the British pound:Regression results indicate that a0 = 0 and a1 = 2. Therefore:a.purchasing power parity holds.b.purchasing power parity overestimated the exchange rate change during the period underexamination.c.purchas
31、ing power parity underestimated the exchange rate change during the period underexamination.d.purchasing power parity will overestimate the exchange rate change of the British poundin the future.ANS: CPTS:125.Which of the following is indicated by research regarding purchasing power parity (PPP)?a.P
32、PP clearly holds in the short run.b.Deviations from PPP are reduced in the long run.c.PPP clearly holds in the long run.d.There is no relationship between inflation differentials and exchange rate movements inthe short run or long run.ANS: BPTS:126.The interest rate in the U.K. is 7%, while the inte
33、rest rate in the U.S. is 5%. The spot rate for theBritish pound is $1.50. According to the international Fisher effect (IFE), the British pound shouldadjust to a new level of:a.$1.47.b.$1.53.c.$1.43.d.$1.57.ANS: ASOLUTION:SOLUTION:(1.05/1.07) (1.50) = $1.47.PTS:127.If nominal British interest rates
34、are 3% and nominal U.S. interest rates are 6%, then the British pound() is expected to _ by about _%, according to the international Fisher effect (IFE).a.b.c.d.e.none of the aboveANS: BSOLUTION:SOLUTION:(1.06/1.03) 1 = 2.9%.PTS:128.There is much evidence to suggest that Japanese investors invest in
35、 U.S. Treasury securities when U.S.interest rates are higher than Japanese interest rates. These investors most likely believe in theinternational Fisher effect.a. Trueb. FalseANS: FPTS:129.Which of the following is not true regarding IRP, PPP, and the IFE?a.IRP suggests that a currencys spot rate w
36、ill change according to interest rate differentials.b.PPP suggests that a currencys spot rate will change according to inflation differentials.c.The IFE suggests that a currencys spot rate will change according to interest ratedifferentials.d.All of the above are true.ANS: APTS:130.The relative form
37、 of purchasing power parity (PPP) accounts for the possibility of marketimperfections such as transportation costs, tariffs, and quotas in establishing a relationship betweeninflation rates and exchange rate changes.a. Trueb. FalseANS: TPTS:131.According to the international Fisher effect (IFE), the
38、 exchange rate percentage change should beapproximately equal to the differential in income levels between two countries.a. Trueb. FalseANS: FPTS:132.Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.a. Trueb. FalseANS: TPTS:133.34.35.36.37.38.The IF
39、E theory suggests that foreign currencies with relatively high interest rates will appreciatebecause the high nominal interest rates reflect expected inflation.a. Trueb. FalseANS: FPTS:1If the IFE theory holds, that means that covered interest arbitrage is not feasible.a. Trueb. FalseANS: FPTS:1If i
40、nterest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies withrelatively high interest rates should have forward discounts and those currencies would be expected todepreciate.a. Trueb. FalseANS: TPTS:1Interest rate parity can only hold if purchasing power parity
41、holds.a. Trueb. FalseANS: FPTS:1If interest rate parity holds, then the international Fisher effect must hold.a. Trueb. FalseANS: FPTS:1Which of the following theories suggests that the percentage change in spot exchange rate of acurrency should be equal to the inflation differential between two cou
42、ntries?a.purchasing power parity (PPP).b.triangular arbitrage.c.international Fisher effect (IFE).d.interest rate parity (IRP).ANS: APTS:139.Which of the following theories suggests that the percentage difference between the forward rate andthe spot rate depends on the interest rate differential bet
43、ween two countries?a.purchasing power parity (PPP).b.triangular arbitrage.c.international Fisher effect (IFE).d.interest rate parity (IRP).ANS: DPTS:140.Which of the following theories can be assessed using data that exists at one specific point in time?a.purchasing power parity (PPP)b.international
44、 Fisher effect (IFE).c.A and Bd.interest rate parity (IRP).ANS: DPTS:141.Which of the following theories suggests the percentage change in spot exchange rate of a currencyshould be equal to the interest rate differential between two countries?a.absolute form of PPP.b.relative form of PPP.c.internati
45、onal Fisher effect (IFE).d.interest rate parity (IRP).ANS: CPTS:142.The following regression analysis was conducted for the inflation rate information and exchange rateof the British pound:Regression results indicate that a0 = 0 and a1 = 1. Therefore:a.purchasing power parity holds.b.purchasing powe
46、r parity overestimated the exchange rate change during the period underexamination.c.purchasing power parity underestimated the exchange rate change during the period underexamination.d.purchasing power parity will overestimate the exchange rate change of the British poundin the future.ANS: APTS:143
47、.The following regression analysis was conducted for the inflation rate information and exchange rateof the British pound:Regression results indicate that a0 = 0 and a1 = 0.4. Therefore:a.purchasing power parity holds.b.purchasing power parity overestimated the exchange rate change during the period
48、 underexamination.c.purchasing power parity underestimated the exchange rate change during the period underexamination.d.purchasing power parity will overestimate the exchange rate change of the British poundin the future.ANS: BPTS:144.Assume that the one-year interest rate in the U.S. is 7% and in
49、the U.K. is 5%. According to theinternational Fisher effect, British pounds spot exchange rate should _ by about _ over theyear.a.b.c.d.depreciate; 1.9%appreciate; 1.9%depreciate; 3.94%appreciate; 3.94%ANS: BSOLUTION:SOLUTION:(1 + .07)/(1 + .05) 1 = 1.9%PTS:145.According to the international Fisher
50、effect (IFE):a.the nominal rate of return on a foreign investment should be equal to the nominal rate ofreturn on the domestic investment.b.the exchange rate adjusted rate of return on a foreign investment should be equal to theinterest rate on a local money market investment.c.the percentage change
51、 in the foreign spot exchange rate will be positive if the foreigninterest rate is higher than the local interest rate.d.the percentage change in the foreign spot exchange rate will be negative if foreign interestrate is lower than the local interest rate.ANS: BPTS:146.Assume that the U.S. one-year
52、interest rate is 5% and the one-year interest rate on euros is 8%. Youhave $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The eurosspot exchange rate is $1.40. What will be the yield on your investment if you invest in euros?a.8%b.5%c.3%d.2.78%ANS: BPTS:147.Assu
53、me that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. Youhave $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an
54、Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australianmarket?a.6%b.3%c.4%d.2%ANS: CSOLUTION:SOLUTION:(1 + .05)/(1 + .07) $0.689 = $0.676. ($100,000/A$0.689) (1 + .06) =A$153,846 $0.676 = $104,000. ($104,000 $100,000)/$100,000 = 4%PTS:148.Assume that th
55、e international Fisher effect (IFE) holds between the U.S. and the U.K. The U.S.inflation is expected to be 5%, while British inflation is expected to be 3%. The interest rates offeredon pounds are 7% and U.S. interest rates are 7%. What does this say about real interest rates expectedby British inv
56、estors?a.real interest rates expected by British investors are equal to the interest rates expected byU.S. investors.b.real interest rates expected by British investors are 2 percentage points lower than the realinterest rates expected by U.S. investors.c.real interest rates expected by British inve
57、stors are 2 percentage points above the realinterest rates expected by U.S. investors.d.IFE doesnt hold in this case because the U.S. inflation is higher than the British inflation,but the interest rates offered in both countries are equal.49.50.51.52.53.ANS: CPTS:1The international Fisher effect (I
58、FE) suggests that the currencies with relatively high interest rates willappreciate because those high rates will attract investment and increase the demand for that currency.a. Trueb. FalseANS: FPTS:1If purchasing power parity holds, then the Fisher effect must also hold.a. Trueb. FalseANS: FPTS:1I
59、f the international Fisher effect (IFE) holds, the local investors are expected to earn the same returnfrom investing internationally as they would from investing in their local markets.a. Trueb. FalseANS: TPTS:1Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia is
60、expected to be5% over the next year. Today you receive an offer to purchase a one-year put option for $.03 per uniton Australian dollars at a strike price of $0.72. Today the Australian dollar is quoted at $0.70. Youbelieve that purchasing power parity holds. You should accept the offer.a. Trueb. Fa
61、lseANS: FSOLUTION:SOLUTION:Spot rate in a year = (1.09/1.05) PTS:1Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%.For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rateshould be _.a.3.43%b.5.68%c.6
62、.5%d.7.3%ANS: ASOLUTION:SOLUTION:PTS:1(1 + .05) (1 + .015) 1 = 3.43%54.Purchasing power parity (PPP) focuses on the relationship between nominal interest rates andexchange rates between two countries.a. Trueb. FalseANS: FPTS:155.According to the international fisher effect (IFE), the exchange rate p
63、ercentage change should beapproximately equal to the differential in income levels between two countries.a. Trueb. FalseANS: FPTS:156.According to purchasing power parity (PPP), if a foreign countrys inflation rate is below the inflationrate at home, home country consumers will increase their import
64、s from the foreign country and foreignconsumers will lower their demand for home country products. These market forces cause the foreigncurrency to appreciate.a. Trueb. FalseANS: TPTS:157.According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in theforeign cou
65、ntry, the home currency should depreciate.a. Trueb. FalseANS: TPTS:158.The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange ratefor the Japanese yen () is $0.0080. After supply and demand for the Japanese yen has adjustedaccording to purchasing power
66、parity, the new exchange rate for the yen will bea.$0.0078.b.$0.0082.c.$0.0111.d.$0.00492.e.None of the aboveANS: BPTS:159.Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S.consumers to _ their imports from New Zealand and New Zealand consumers to
67、 _ their importsfrom the U.S. According to purchasing power parity (PPP), this will result in a(n) _ of the NewZealand dollar (NZ$).a.reduce; increase; appreciationb.increase; reduce; depreciationc.reduce; increase; depreciationd.reduce; increase; appreciationANS: CPTS:160.The following regression w
68、as conducted for the exchange rate of the Cyprus pound (CYP):Regression results indicate that a0 = 0 and a1 = 2. Therefore,a.purchasing power parity holds.b.purchasing power parity overestimated the exchange rate change during the period underexamination.c.purchasing power parity underestimated the
69、exchange rate change during the period underexamination.d.purchasing power parity will overestimate the exchange rate change of the Cyprus poundin the future.ANS: CPTS:161.Among the reasons that purchasing power parity (PPP) does not consistently occur are:a.exchange rates are affected by interest r
70、ate differentials.b.exchange rates are affected by national income differentials and government controls.c.supply and demand may not adjust if no substitutable goods are available.d.all of the above are reasons that PPP does not consistently occur.ANS: DPTS:162.Which of the following is not true reg
71、arding IRP, PPP, and the IFE?a.IRP suggests that a currencys spot rate will change according to interest rate differentials.b.PPP suggests that a currencys spot rate will change according to inflation differentials.c.The IFE suggests that a currencys spot rate will change according to interest ratedifferentials.d.All of the above are true.ANS: APTS:1
